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Editorial 7 MIN READ

Benefit corporation, reappraised: what the label actually buys in 2023

Three things get called the same thing, and only one of them is a corporate form

The Editors
Staff, Incorporator.org
7 min read Updated
Contents 6 sections
  1. Three labels, one source of confusion
  2. What Delaware's PBC statute actually requires
  3. The 2020 amendment, and why it matters now
  4. Patagonia, and the limits of the form
  5. Who should actually use it
  6. Sources

benefit corporation is a state-law corporate form. A B Corp is a certification sold by a nonprofit. A public benefit corporation, or PBC, is Delaware's version of the first. These are three different things that share a vocabulary, and a decade of marketing has made them almost impossible to separate without a lawyer in the room.

This piece treats the form as it exists in April 2023, after Patagonia's restructuring, after a cluster of PBC IPOs, and after Delaware lowered the bar for existing corporations to convert.

Three labels, one source of confusion

The B Corp certification is a private credential issued by B Lab, a Pennsylvania nonprofit, based on an assessment of social and environmental performance. It says nothing about legal form. A Delaware C-corp, a California LLC, and a New York limited partnership can all be certified B Corps if they pass the assessment and pay the annual fee. The credential renews on a cycle and can be revoked. It is a marketing signal, not a charter provision.

The benefit corporation is a charter form. Maryland passed the first benefit corporation statute in April 2010, and as of early 2023 more than forty states have enacted some version of the Model Benefit Corporation Legislation. These statutes let a for-profit elect, in its charter, to pursue a general public benefit alongside shareholder value, and they adjust directors' duties accordingly. Filing the charter creates the entity. B Lab is not involved.

Delaware took its own path. Rather than adopt the Model Act, its legislature passed Subchapter XV of the DGCL in 2013, creating the public benefit corporation under a distinct scheme codified at 8 Del. C. §§ 361 to 368. Every PBC is a benefit corporation in the generic sense, but Delaware's code calls them PBCs. The distinction matters because the Delaware provisions, not the Model Act, govern the entities most venture-backed companies actually use.

A company can wear any combination of the three labels. Patagonia is a California benefit corporation and a certified B Corp. Kickstarter is a Delaware PBC and a certified B Corp. Plenty of certified B Corps are ordinary C-corps that never changed their charter at all.

What Delaware's PBC statute actually requires

Under 8 Del. C. § 362, a PBC is a for-profit corporation organized to produce a public benefit and to operate in a responsible and sustainable manner. The charter must identify one or more specific public benefits the corporation will pursue. "Public benefit" is defined broadly in § 362(b) as a positive effect on categories of persons, entities, communities, or interests other than stockholders in their capacity as stockholders.

The load-bearing provision is § 365. Directors of a PBC shall balance the pecuniary interests of stockholders, the best interests of those materially affected by the corporation's conduct, and the specific public benefit identified in the charter. This tripartite duty replaces the default Delaware rule that directors owe fiduciary duties primarily to stockholders.

Section 367 limits who can sue to enforce it. Only stockholders holding at least two percent of the outstanding shares, or shares worth at least two million dollars in a public company, have standing to bring a derivative suit over the public-benefit duty.

PBCs must also produce an ongoing report. Section 366 requires a biennial statement to stockholders covering the corporation's objectives, the standards it adopted to measure progress, and objective factual information on how it performed. The statute does not require the report to be audited, third-party certified, or made public, though many PBCs publish it anyway.

The 2020 amendment, and why it matters now

For most of the form's life, the friction point was the conversion threshold. An existing Delaware corporation that wanted to become a PBC needed a ninety percent stockholder vote under the original § 363, a supermajority unreachable in any company with a real dissenting block. Boards that liked the form had to either stomach that vote or accept that the choice was only available at formation.

Delaware House Bill 341, signed into law on July 16, 2020, rewrote that rule. The amended § 363 now requires only a two-thirds vote of the outstanding stock to convert, matching the threshold used for most other charter amendments. The same bill removed the appraisal rights that dissenting stockholders previously had on conversion.

The effect on capital markets was immediate. Lemonade went public as a PBC in July 2020, the first U.S. public company to IPO in the form. Vital Farms followed in August 2020. Allbirds went public as a PBC in November 2021. Veeva Systems, already a mature Delaware C-corp with a large stockholder base, used the revised threshold to convert to a PBC in February 2021, which became the proof point that an existing public company could make the switch without breaking itself.

The form is no longer a curiosity at the venture stage. It has been through the underwriters, the exchanges, and a public-company conversion. Boards considering it in 2023 have concrete precedent to reason from.

Patagonia, and the limits of the form

Yvon Chouinard's September 2022 restructuring of Patagonia is the case study that gets cited most often, and it is the one that most needs to be read carefully. Patagonia was already a California benefit corporation and a B Corp. The 2022 change was not about the charter form. The Chouinard family transferred roughly ninety-eight percent of the company's equity (the non-voting stock) to the Holdfast Collective, a 501(c)(4), and the remaining two percent of voting stock to the Patagonia Purpose Trust. Dividends from the operating company flow to the Holdfast Collective and are directed to environmental causes.

The benefit-corporation form did not accomplish the transfer. A 501(c)(4) did, and a trust did, and a very unusual founder did. What the charter supplied was continuity: Patagonia's directors still owe the tripartite balancing duty the California statute imposes, which matters once the family is no longer on the cap table.

For the typical founder, Patagonia illustrates what the form does and what it does not. It does not give away equity, shelter a transfer from tax, or force future directors to honor your intentions if you do nothing else. It supplies a statutory floor for mission-aligned governance that survives ownership changes. Useful if you are planning succession; almost beside the point if you are raising a seed round.

Who should actually use it

The PBC makes sense when three conditions line up. The company has a real operational commitment to a stated public benefit that the founders want protected against future boards and future owners. The investors understand the form and have modeled its effect on their exit. And the company has the internal capacity to produce the § 366 report without turning it into a vanity document.

When those conditions are absent, the form adds friction without adding much protection. The biennial report is a genuine operational burden for a small company. Some institutional investors still read PBC status as a signal that the board will be slower to accept a premium acquisition offer, and the tripartite duty gives them a non-crazy reason to think so. A founder who wants the marketing benefit of mission signaling without the charter constraint is better served by B Corp certification on top of a conventional C-corp.

Three practical notes for 2023 formations. The PBC is formed by filing a certificate of incorporation with the Delaware Division of Corporations, the same way any Delaware corporation is formed. It is therefore a "reporting company" under the Corporate Transparency Act, 31 U.S.C. § 5336, and will owe a beneficial-ownership report to FinCEN once the rule's filings open in January 2024. A Delaware C-corp that wants to convert needs a two-thirds stockholder vote under the current § 363, plus a charter amendment identifying the specific public benefit. And a benefit corporation formed in any non-Delaware state is governed by that state's statute; the director-duty language varies, so read the one you are forming under.

The question worth sitting with is not whether the form is good. It is whether a charter provision, enforceable by a narrow class of stockholders and reported on biennially, is the right tool for the commitment you are trying to make. Sometimes it is. A great many of the companies that wear the label do not need it, and a few that wear all three labels at once would have been better off picking one.

Sources

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